Taxation and regulation of bonus pay – cover

Date: 2013-02-18

Reference number: OPUSeJ 201302181736TRB

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Title: Taxation and regulation of bonus pay

Authors: Besley, Timothy1 and Maitreesh Ghatak2

Abstract: We explore the consequence for taxation and regulation of bonus pay when investors are protected by taxpayers from downside risk. The paper develops a model where workers in financial sector firms make decisions about effort and risktaking which are influenced by the structure of bonus pay. Bailouts lead to too little effort, too much risk-taking and increase inequality. We show that the optimal structure of bonuses can be implemented by a combination of a regulation on the structure of bonuses and a tax on their level.

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The Suntory Centre, Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science

We thank Abhijit Banerjee, Konrad Burchardi, Rocco Macchiavello, John Vickers, and participants in seminars at NIESR, Peking University, STICERD and Warwick for helpful comments, and Prajakta Kharkar for research assistance.

Department of Economics, Houghton Street, London School of Economics, London WC2A 2AE, UK. Tel: (020) 7955 6674. Email:1, 2

Keywords: taxation; bonus; incentives

Subject: Economics/ bonus pay

Language: English

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Citation: Besley, Timothy and Maitreesh Ghatak, 2011, “Taxation and regulation of bonus pay”, CEPR Industrial Organization and Public Policy Working Paper No. 8532

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